Saturday, January 02, 2010

Tax Tips for Writers #1: Uncle Sam Pays Writers

No, I'm not talking about grants.

I'm talking about establishing yourself as a legitimate home-based business, and getting all of the commensurate tax benefits that go along with that. Writers can fully qualify for these tax breaks, but it requires education, preparation, and dedication to legitimately claim them.

If you're like me, the New Year typically brings resolutions related to two major aspects of life: work and money. And, for me, "work" includes "writing" ... an enjoyable form of work, to be sure, but work nonetheless. So here are some thoughts on how I've been able to keep more of my writing income the last couple of years, thanks to the U.S. Tax Code (behemoth though it is).

Why would Uncle Sam pay writers? Because small business is regularly the largest growing sector of the economy, and that includes home-based businesses. Microsoft, IBM, Ford, Disney, GE, and Google ... all are just some examples of major corporations that started as small home-based businesses.

Similarly, every writer out there who is now a major name started as someone who was writing in their spare time, with dreams of making it big.

One such dreamer, esteemed author Robert J. Sawyer, told me at the Banff Centre for the Arts' "Writing with Style" workshop in fall 2005, "Live a deductible lifestyle."

What most don't know is that the deductions that apply when you're successful also apply when you're still trying to be successful. I personally didn't deduct writing expenses for years, because I was afraid that my net loss would trigger an audit and penalties, but I've since found out that I have the legal right to claim those deductions.

The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them by means which the law permits, cannot be doubted.
- United States Supreme Court (Gregory v. Helvering, 293 US 465)

Do you qualify for these deductions? If you are writing with a profit intent, you are actually the head of your own home-based business. Mine is called The Philosopher's Stone and has a federal tax ID number (because I employ my wife as my assistant) but you don't need all of that. If you work the business regularly and consistently, you qualify for business deductions on your taxes.

If you are not writing regularly and consistently with the intent to make a profit, you do not qualify as a business. If you're writing purely out of love of it, then it's a hobby, not a business. Keep records, of course, because your expenses can offset your profits as a profit-generating hobby, but you can't deduct over and above that ... and that's where Uncle Sam "pays" you for writing. And you never know when your hobby may take off!

How do I prove I'm a business? Here are the records I keep:
  • A business plan, including forecasted revenues/expenses with an objective of future net profits.
  • A business bank account (business and personal finances should not mix - unless you're loaning funds to your business or repaying loans from your business)
  • Clear business financial records (I use Quicken Home and Business)
  • Annual report of profit/loss, along with revisions of business plan and objectives for the coming year (I do this in lieu of revising the whole business plan each and every year)
  • Daily ledger of all business activities (to establish the "regularly and consistently" part)
What deductions can you qualify for? Well, let's see, as a writer you can probably qualify for deductions in the following areas, at least:
  • Home Office (Business Use of Home - this is the only way to deduct portions of rental expenses from federal taxes)
  • Business Use of Vehicles
  • Research (magazines, books, and possibly movies/television, depending on what you write about)
  • Business-related travel (conventions, interviews, research trips, book signings, etc.)
  • Employee benefits (hire your spouse as an employee - and make him/her actually do work - or, if you're single, establish your business as an LLC and hire yourself - you'll have to pay Social Security & Medicare on the wages, but this converts money from available)
  • Self-employed retirement account (if you're actually making a profit)
  • Possibly other expenses such as cellphone, internet, entertainment, meals, etc. ... these can require some planning to legitimately work as business, but are well worth it.
How do I get the money? Once you are keeping the documentation to establish yourself as a business, working it regularly, and taking the necessary deductions, you can then calculate the overall amount you'll save on taxes. You can adjust your W-4 accommodations accordingly, so that your paychecks from your (or your spouse's) W-2 employer have less removed from them. There's an IRS Withholding Calculator online which can help with this, or you can have your accountant take care of it. Every paycheck goes up, and that's your pay for regularly and consistently writing with the intent of profit.

Disclaimers: I am not a tax professional, so get the advice of one for your particular situation. Though these things generally apply, they don't apply to every situation. You may get audited, of course, but you'll have the documentation to get out of the audit, because you are only claiming legitimate business deductions. If you claim an illegitimate deduction, you deserve to get nailed.

Resources: Most of the information for this post comes from the following book, which along with some other resources have helped guide me through my economic re-awakening as a info-preneur the last couple of years.

Do your own research. Use this post as a jumping-off point for organizing your financial and writing spheres. Here are some free resources to help get started:

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